NGL Energy Partners LP — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2019. Dollar amounts are in U.S. dollars; financial statement amounts are generally in millions unless otherwise stated.
Business context
NGL operates in Crude Oil Logistics, Water Solutions, Liquids, and Refined Products and Renewables. On September 30, 2019, it sold TransMontaigne Product Services, LLC (TPSL) for approximately $275.5 million in total consideration. TPSL is reported as discontinued operations, and its sale represents a strategic shift. The filing also reports the July 2018 disposition of most of the Retail Propane business as discontinued operations.
Financial results and key metrics
| Metric | Three months ended September 30, 2019 | Three months ended September 30, 2018 | Six months ended September 30, 2019 | Six months ended September 30, 2018 |
|---|---|---|---|---|
| Revenue from continuing operations | $4,289.3 | $5,116.0 | $9,455.8 | $9,375.0 |
| Operating income (loss) | $46.4 | $14.3 | $82.6 | $(163.6) |
| Income (loss) from continuing operations | $0.7 | $(26.0) | $(1.7) | $(284.8) |
| Net income (loss) attributable to NGL | $(201.2) | $355.5 | $(192.9) | $187.0 |
| Net income (loss) per common unit | $(1.72) | $2.70 | $(2.68) | $1.17 |
| Adjusted EBITDA from continuing operations | $119.0 | $91.7 | $212.8 | $163.2 |
Revenue less cost of sales was approximately $232.0 million for the quarter (5.4% of revenue), versus $170.8 million (3.3%) a year earlier. Operating margin was approximately 1.1%, versus 0.3%. Adjusted EBITDA is a non-GAAP measure defined by the partnership and should not be treated as a substitute for GAAP earnings or cash flow.
- Quarterly segment operating income: Crude Oil Logistics $38.5 million versus $31.0 million; Water Solutions $21.3 million versus $9.8 million; Liquids $8.4 million versus $10.8 million; Refined Products and Renewables $16.7 million versus a $1.9 million loss.
- Cash flow, six months: operating cash used was $4.5 million overall, including $20.7 million used by continuing operations and $16.2 million provided by discontinued operations. Continuing-operations investing cash use was $902.3 million, including $259.1 million of capital expenditures and $647.0 million for acquisitions. Financing provided $640.3 million.
- Balance sheet at September 30: cash was $21.2 million; current assets were $1,531.2 million and current liabilities $1,298.5 million, implying working capital of about $232.7 million. Total assets were $6,664.0 million.
- Debt and liquidity: debt face amount was $2,794.5 million (book value $2,773.9 million), up from $2,172.8 million face amount at March 31. Revolver borrowings were $1,093.0 million, term debt $250.0 million, and letters of credit $189.6 million. The partnership reported compliance with debt covenants at quarter-end.
- Cash interest paid for the six months was $65.6 million. The partnership declared common-unit distributions of $0.39 per unit for the quarter and reported preferred-unit distributions under its Class B, C, and D securities.
Material changes and unusual items
- Quarterly continuing revenue fell approximately 16% year over year, largely reflecting lower crude oil and liquids prices and lower crude oil volumes. For the six-month period, revenue was slightly higher year over year.
- Improved operating results included stronger Water Solutions disposal revenue and better Refined Products and Renewables results, including favorable derivative effects. Liquids operating income was lower for the quarter, with propane margins affected by inventory values adjusting slowly to falling commodity prices.
- The TPSL sale generated a reported $174.4 million loss on disposal, contributing to the large quarterly and six-month net losses despite near break-even continuing-operations results for the quarter. Prior-period discontinued-operation results include substantial disposal gains, limiting comparability.
- NGL acquired Mesquite on July 2 for a preliminary purchase price of approximately $885.3 million, including $592.5 million cash, Class B preferred units, and contingent deferred payments with an acquisition-date fair value of $190.0 million. The deferred-payment liability is recorded at $190.0 million. Mesquite contributed $25.6 million of revenue and $8.4 million of operating income after acquisition through September 30.
- Funding included $450.0 million of 7.50% notes due 2026, a $250.0 million term loan, and preferred-unit issuances. NGL redeemed its Class A convertible preferred units for $265.1 million during the six months and issued Class D preferred units with warrants exercisable for 17 million common units.
- On October 30, after quarter-end, NGL amended its credit facilities, increasing aggregate commitments to $1.790 billion and revising financial covenants. It also completed the $624.4 million Hillstone acquisition on October 31, funded in part by a further $200.0 million Class D preferred-unit issuance; these are subsequent events, not quarter-end transactions.
Outlook, risks, and contingencies
Management stated that expected operating cash flows and borrowing capacity under the revolving credit facility should meet liquidity needs, while noting that additional capital or asset sales could be needed if plans change or acquisitions occur. It intends to pursue Water Solutions and Crude Oil Logistics growth, including basin expansion and acquisitions. The filing provides no specific earnings or revenue guidance.
Key risks include volatile energy prices and margins, production and demand changes, working-capital seasonality, commodity and counterparty credit exposure, access to capital, debt service and covenant requirements, acquisition integration and execution, and environmental, regulatory, operational, and litigation risks. Management noted that working-capital borrowing needs generally rise from June through December as inventories are built. The filing reports a $2.3 million environmental liability and a $12.5 million accrual for the Gavilon renewable-fuel matter; the consent decree also required payment of $25.0 million and retirement of 36 million RINs, which NGL says it completed. A separate LCT Capital litigation matter remained pending, with $2.5 million accrued at quarter-end.
Important facts for investors to verify
- Review the TPSL sale proceeds, $174.4 million disposal loss, and resulting impact on continuing versus discontinued results and future segment comparisons.
- Assess whether operating cash generation and available revolver capacity can support the acquisition-led expansion, capital spending, distributions, and debt obligations.
- Check the amended credit-facility covenants and subsequent Hillstone financing and acquisition terms, including their effects on leverage and preferred-unit obligations.
- Evaluate the quality and sustainability of Adjusted EBITDA growth, including the impact of derivative marks, inventory adjustments, and other exclusions from this non-GAAP measure.
- Monitor Mesquite contingent consideration, acquisition purchase-price allocations, the NGL-related litigation and environmental accruals, and potential dilution from outstanding warrants.